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ATB Capital Markets Institutional Investor Conference - Day 3 Highlights
Highlights from the Life Sciences sector.
David Kideckel, PhD, and Kenric Tyghe
On January 14, ATB Capital Markets hosted the third day of its 9th Annual Institutional Investor Conference, focused on Life Sciences. In the full report, we highlight key takeaways from our moderated panels and fireside chats.
- Attractive US Opportunity Accompanied by Risks: The federal legalization of cannabis in the US could open a large opportunity for Canadian licensed producers (LPs), retailers, and custom manufacturers. These companies could enter the US market either directly or through licensing/partnerships. Some companies, such as HEXO and Aurora, already have a presence in the US hemp-derived CBD market. While the US is a different market and US MSOs are well-capitalized, Canadian LPs could compete well from a regulatory compliance perspective, as Canadian regulations are much stricter than many US states and Canada may be used as a model jurisdiction by US regulators. In our view, the US market presents an attractive opportunity that also comes with risks, given its highly competitive environment and different market dynamics. From a historical perspective, we note that companies that are successful in Canada may not necessarily be in the US.
- Increased Importance of Innovation and Science: As the Canadian cannabis market evolves, we believe that investments in innovation and R&D will become increasingly important for companies to compete effectively. We believe that cannabis 2.0 products sales will continue to grow and new innovative products will be launched into market; moreover, the cannabis industry is now moving into cannabis 3.0 products (health and wellness) entailing new formats, such as bath bombs and shampoos. We note that the US business environment is more conducive to companies trying to protect and monetize their intellectual property (IP); therefore, if and when the US federally legalizes cannabis, the legal defense of IP assets may become a key component of evolution and sophistication in the global cannabis market, one which may benefit innovative companies over the long-term.
- Canadian Cannabis Retailers: The Canadian cannabis retail sector has demonstrated consistent profitability with key players reporting positive adjusted EBITDA even amid a tough operating environment with COVID-19. The sector’s profitability contrasts with negative overall results in the LP sector. In our view, this is due to the favourable near-term conditions which retailers face, including lower capital requirements, increased sales of 2.0 products, and a long runway for store expansion. Given the resilience and operational efficiency of Canadian cannabis retailers in a strict regulatory environment, we believe that they may be particularly well-positioned to effectively compete in the US market once cannabis becomes federally legal.
- Bullish on Federal Legalization: With the Democrats controlling both the House and Senate, the tone among the panelists on Federal legalisation of cannabis was necessarily cautiously positive, and supported by expectations that we could see both the SAFE Act and the MORE Act passing in the next 12-18 months, with the SAFE Act potentially passing in 2021. The potential passage of either bill would be materially positive for the space, as has been at least partially reflected in the marked recent run-up of US multi-state operators (MSOs). The UMMAR cannabis index is up 28.6% year to date and 71.2% in the last 12-months.
- Illinois Market Growth Expected to Accelerate Through 2021: While the license issuance delays have negatively impacted the roll-out of new dispensaries in the state, the belief from the teams presenting was that a combination of a return to normalcy in 2021 through a recovery in tourism and a back-end weighted ramp of new stores (on assumed new license issuance in the spring) support strong market growth in 2021. The pace of growth is expected to accelerate further in 2022 in conjunction with accelerated store openings and further improvements in the tourism backdrop. The expectation is for the market to generate sales between $3 billion and $4 billion at maturity.
- Pennsylvania Remains a Key Market in the Mid Atlantic Region: In the Mid-Atlantic, the general consensus is that Pennsylvania remains the most attractive medical-market given (i) it’s growing at a faster pace than Florida with over 450,000 qualified patients despite supply constraints and restriction on pre-rolls and edibles (ii) the likelihood the state will legalize adult use over the next 12 to 18 months, with first year sales expected to resemble that of Illinois, and (iii) possible delays in legalization of key contiguous markets, on which the well managed Pennsylvania program would capitalize. Despite the delays in the signing of the adult use legislation bill, New Jersey is expected to move forward in short order with adult-use sales still expected to begin in mid-late 2021.
- Florida is Flying, California is Complicated: in Florida, the introduction of edibles has been a marked positive for the market, helping drive strong patient count growth and spend which, dovetailing with possible legalization in 2022, is driving a step change in market dynamics and M&A activity in the market. While there was no consensus on the best approach to winning California, each panel member acknowledged the ongoing challenges of driving profitable growth at retail in the state given market dynamics, but also the imperative (on a medium-long term view) of having scale in the state.
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